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June 10, 2024

How to Choose Between a Sole Proprietorship and an LLC

One of the most critical decisions that any entrepreneur has to make is to choose the right legal structure for their new business. Your choice of business structure can affect your personal liabilities, have different tax implications, and give you different levels of management control.

Therefore, it is important to understand exactly what benefits each type of business entity offers before you make your choice.

Ready to learn more about sole proprietorships and LLCs?

Keep reading to understand the benefits offered by sole proprietorships and LLCs in detail.

Benefits of a Sole Proprietorship

The first and most important benefit that a sole proprietorship provides is that it gives the owner absolute control of the business. You are your own boss and have complete authority over day-to-day business decisions.

Another advantage that a sole proprietorship provides is that it is easy to set up. If you use your own name, then you do not even have to worry about state filings. And, if you choose a different business name, then all you need is a DBA (doing business as) certificate.

If you form a sole proprietorship, you do not need to pay an annual filing fee, which you will need to do for an LLC.

Benefits of an LLC

The main advantage that an LLC provides over a sole proprietorship is to limit the financial liability on the owners. In a sole proprietorship, the owner is responsible for paying off the company’s financial obligations and their personal assets are at risk. This is not the case for an LLC, as personal and business finances are kept separate.

Another advantage of an LLC over a sole proprietorship is that it provides tax benefits. A sole proprietor has to pay a 15.3% self-employment tax, which the members of an LLC do not need to pay. 

LLCs also provide flexibility in how you want to be taxed. An LLC can be taxed as a sole proprietorship, partnership, or corporation. 

Which One Should You Choose?

That is a choice that you will have to make based on your personal preferences. An LLC is usually preferred because it provides personal liability protection in case the company suffers losses.

Do you still have doubts or want to learn more?

To learn more about which one of these is better, check out this infographic, which was originally created by GovDocFiling.

Sole Proprietorship vs. LLC: Which One Is Right for Your Business?
Image Courtesy: GovDocFiling

Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity. 

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